**5. Conclusion**

Bank regulations and supervisions are to make the financial system more resilient that facilitate the stakeholders, creditors, depositors, and different counterparties. It prevents banks to take excessive risk. Therefore, to increase the financial stability around the world, BCBS a committee of BIS provides prudential guidelines for the banks and other financial institutions. The committee has advised three capital accords: Basel I, Basel II, and Basel III. Basel III is addressed to mitigate the regulatory lapses and systematic risk faced by the banks during recent financial crisis of 2007–2008.

**13**

**Author details**

\* and Razali Haron<sup>2</sup>

provided the original work is properly cited.

\*Address all correspondence to: aysasiddika25@gmail.com

1 Institute of Business Administration (IBA-JU), Jahangirnagar University, Dhaka,

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

2 IIUM Institute of Islamic Banking and Finance (IIiBF), International Islamic

Aysa Siddika1

Bangladesh

University, Malaysia

*Capital Adequacy Regulation*

*DOI: http://dx.doi.org/10.5772/intechopen.92178*

*Capital Adequacy Regulation DOI: http://dx.doi.org/10.5772/intechopen.92178*

*Banking and Finance*

of Islamic banks [14].

during the period of excessive credit growth.

**4. Empirical studies on capital regulation and bank risk**

unique items in the liability side of the balance sheet, risk sharing with the depositor and investor, absence of interest, and so on. Moreover, Islamic banks cannot access some credit derivatives to mitigate risk like conventional banks because of governing by the Shariah Principle. Wide range of financing mode also poses Islamic banking to face different kinds of risk. Since the operation of Islamic banking differs from the conventional banking, the determination of capital requirements also differs [13]. Studies find BCBS capital regulation does not address the risk of Islamic bank and lacks the goal to minimize the level of risk faced by the Islamic banks. Furthermore, it contributes to increase the risk

The Islamic Financial Services Board (IFSB) is an international organization that provides prudential guidelines and standards for the Islamic banks, insurance (takaful), and capital markets to enhance the stability of the Islamic financial industry. IFSB provides the standards aligning with the global regulatory standards in calculating capital requirements, thereby making disclosure toward transparency and market discipline [12]. However, because of asset-based financing, profit-loss sharing, profit bearing, or loss sharing principle, the capital determination is different from the conventional banking institution. Like the BCBS, IFSB also advises countercyclical capital buffer to the Islamic banks to reduce the systematic risk

The relationship between bank capital level and risk management is the most studied issue after the capital regulation regime. The empirical evidence provides useful insights about the factors affecting the risk undertaking of the banks. However, the studies focusing on the relationship between capital, risk management, and performance found contrasting results. Several studies found, in effect, that capital regulation stimulates the banks to take excessive risk through allowing the banks to increase riskier investment with the increase of bank capital [6]. Regulatory restriction, lower rate of return, riskier portfolio, and deposit insurance are the major causes identified behind the positive association between risk and capital regulations [15, 16]. Building capital raises cost of capital, decreases expected profit and rate of return, and induces the bank to invest in riskier sector that is more riskier in the long run [16]. Conversely, strict regulation, income diversity, and bank size are the factors identified behind the negative relationship between capital regulation and bank risk [17–20]. However, studies also find that capital regulation has different impact on conventional and

Bank regulations and supervisions are to make the financial system more resilient that facilitate the stakeholders, creditors, depositors, and different counterparties. It prevents banks to take excessive risk. Therefore, to increase the financial stability around the world, BCBS a committee of BIS provides prudential guidelines for the banks and other financial institutions. The committee has advised three capital accords: Basel I, Basel II, and Basel III. Basel III is addressed to mitigate the regulatory lapses and systematic risk faced by the banks during recent financial

**12**

Islamic banks.

**5. Conclusion**

crisis of 2007–2008.
